Management Accounting Research, 2002, 13, 379400

doi: 10.1006/mare.2002.0197
Available online at http://www.idealibrary.com on

Contingencies influencing the management

accounting practices of Estonian
manufacturing companies

Toomas Haldma* and Kertu Lts*

Having regained independence in 1991, Estonia has undergone fundamental political

and structural changes over the last decade, which have also affected the operation of
its companies. This paper examines the management accounting practices of Estonian
manufacturing companies, exploring the main impacts on them within a contingency
theory framework. The methodology comprises an analysis of 62 responses to a postal
questionnaire survey carried out among the largest Estonian manufacturing companies.
It is comparatively infrequently that Estonian manufacturing companies have made
improvements in their cost accounting methods, although the majority of respondents
appear to acknowledge the importance of these practices in finding and lowering real
product costs and modernizing the cost accounting systems. The effectiveness of an
accounting systems design depends on its ability to adapt to changes both in external
circumstances and internal factors. We have found some evidence that changes in cost
and management accounting practices are associated with shifts in the business and
accounting environment as external contingencies, and with those in technology and
organizational aspects as internal contingencies. This research aims on the one hand to
confirm earlier findings related to the contingent factors that influence management
accounting and on the other, to identify possible new factors, such as, for example, the
legal accounting environment and shortage of properly qualified accountants.
c 2002 Elsevier Science Ltd. All rights reserved.

Key words: management accounting practice; contingency theory; transition economy;

Estonia.

*Department of Finance and Accounting, Faculty of Economics and Business Administration, University
of Tartu, 4, Narva Road, 51009 Tartu, Estonia.
E-mail: toom@mtk.ut.ee
E-mail: kertu@mtk.ut.ee

10445005/02/$ - see front matter c 2002 Elsevier Science Ltd. All rights reserved.

380 T. Haldma and K. Lts

1. Introduction

In the conditions of market economy and intensified competition, the management

of a company, in order to be consciously competitive on the market, needs to have
objective information about the formation and shape of the companys performance,
which is documented in mandatory financial statements. Therefore, the need for
developing such cost and management accounting systems (MAS), which could
provide adequate information about the main impacts on cost characteristics and
companies performance, has grown rapidly in Estonia and all the other former
socialist countries.
The habitual cost and management accounting practices of Estonian companies
can be described, on the one hand, by the traditions and knowledge that have their
origins in their centrally planned economic background, and on the other, by the
necessity to solve urgent problems of everyday management. Hence the MAS of
the companies operating in the conditions of transition should provide adequate
information to help managers take decisions at different management levels. To
be able to make generalizations about the directions of development of MAS, both
researchers and practitioners need more systematic information about the currently
operating cost accounting and MAS and the factors influencing them. Therefore,
this study is focused on the contingencies that influence companies MAS, with
a particular emphasis on those operating in the transition economies. The paper
aims to describe the stages and tendencies in the development of the management
accounting issues in Estonian companies, analysing the impacts on MAS by means
of the contingency approach. Considering the enormous changes that have taken
place in the social and economic environments, it will be reasonable to expect
significant changes to have also occurred in the MAS. Thus, besides the description
of the situation, this study will examine the factors influencing the MAS applied by
Estonian manufacturing companies.
The paper makes two main contributions to the existing management accounting
literature. Firstly, it has to be admitted that the number of studies focusing on devel-
opments in management accounting in the transition countries is limited, especially
as regards studies that apply the contingency approach. Thus, at a more general level,
our findings may shed light on the development of management accounting in other
developing societies presently undergoing rapid changes. Secondly, we argue that
the environmental aspect affecting the company MAS in the initial period of tran-
sition is distinguishable at two levels: the general business (external) environment
level and the legal accounting environment level. Conceptual changes in the legal
(financial) accounting level of a company would therefore serve as a precondition for
the design and introduction of its management accounting area, and consequently
the development of its MAS.
Although we will examine the management accounting position in Estonian com-
panies, there are many features of contingencies that have influenced companies in
other transition economies in a similar way. At the same time, our study involves
uniquely Estonian features that set the accounting issues of the manufacturing com-
panies we study apart from those of other transition countries. The differences result
mainly from the different developmental levels of financial accounting and audit-
ing regulations as a precondition for the design and introduction of the management
accounting area and companies MAS.
 Management Accounting Practices of Estonian Manufacturing Companies 381

The paper is organized as follows. Section 2 is a brief overview of the previous

investigations in the field of management accounting in the transition countries. Sec-
tion 3 outlines the elements of the contingency theory of management accounting,
and Section 4 discusses the research sample. Section 5 presents our findings on driv-
ing forces of the management accounting practices of Estonian manufacturing com-
panies from four perspectives: catalysts for the design and formation of MAS; anal-
ysis of the role of environmental contingencies in management accounting practices;
analysis of the role of technological contingencies in management accounting prac-
tices; analysis of the role of organizational contingencies in management accounting
practices. Finally, Section 6 presents some concluding remarks on the evolution of
MAS in Estonian companies.

2. Previous research in management accounting in the transition countries

Over the last decades, management accounting has emerged as a comparatively pop-
ular research topic in market economy countries. Different surveys on management
accounting have been carried out in several European countries and their results have
been reported in various publications (Drury et al., 1993; Amat et al., 1994; Bhimani,
1996; Lukka and Granlund, 1996).
Analysing management accounting research done in the Eastern and Central Euro-
pean transition countries on the basis of the publications in Management Accounting
Research and The European Accounting Review, and presentations at the Annual Con-
gresses of the European Accounting Association, we discovered that in these coun-
tries management accounting is still in its initial stages of development and in the
process of developing into a research area in its own right.
During the last eight years (19942001) only few papers dedicated to the practice
and development of management accounting in the Eastern European countries have
appeared in Management Accounting Research. From the information at the authors
disposal, there were only two: in 1994 a paper about accounting in an EastWest
joint venture (Southworth, 1994) and in 2000 a paper about management accounting
practices in a Hungarian chemical company (Vamosi, 2000). The latter discusses
institutionalization aspects of management accounting.
The European Accounting Review has published various papers about accounting
and related areas in the Eastern European countries during the last nine years (1993
2001). Several publications address the subject of financial accounting and auditing in
Poland, Czech Republic, Romania, etc. In 1995 The European Accounting Review dedi-
cated a special edition to accounting in Central and Eastern Europe, which comprised
an introductory article followed by a number of papers analysing the characteris-
tic features of development of accounting in Poland, the Czech Republic, the Baltic
States, Hungary, Romania, Slovenia, Yugoslavia, and Russia. All the papers in this
edition concentrated on financial accounting, whereas no aspects of development or
practice of cost accounting and management accounting were even mentioned in the
introductory paper (Bailey, 1995). This does not mean that cost accounting and man-
agement accounting did not exist at that time or was not considered to be a research
topic at all. The above-mentioned fact merely confirms that the transition countries
prioritized the development of financial accounting, while management accounting
was only in its initial stages of development. The main reasons for that will be anal-
ysed later on.
382 T. Haldma and K. Lts

Table 1
Structure of the presentations at the Annual Congresses of the European Accounting Association in 19932001

1993 1994 1995 1996 1997 1998 1999 2000 2001

Total number of presentations 236 293 343 352 367 325 388 396 369
Number of papers presented by 13 21 31 21 21 16 7 12 15
the representatives of Eastern
European countries
Number of papers dedicated to 1 1 4 2 4 4 2 1 2
management accounting in
Eastern Europe
Number of symposia dedicated 1 2 1 0 0 0 0 0 0
to accounting in Eastern Europe

Yet the authors of this paper have some evidence that different aspects of man-
agement accounting have been employed and surveyed in some Eastern and Central
European countries. An analysis of the presentations made at the Annual Congresses
of the European Accounting Association between 1993 and 2001 confirmed that at
that time in several Eastern and Central European countries different surveys were
made of management accounting practices, particularly in Poland, Yugoslavia, Czech
Republic and Estonia. Nevertheless, the number of the presentations dedicated to
issues of management accounting in Eastern and Central Europe is not large even in
comparison with the total number of presentations about accountancy in Eastern and
Central Europe in general. These are summarized in Table 1.
The number of presentations on accounting in Eastern Europe, listed in Table 1
grew from 13, made in Turku in 1993, to 31 made in Birmingham in 1995. At
the following congresses the number of papers presented by Eastern and Central
European academics and practitioners remained within the region of 20. One of
the reasons which could decrease the number of presentations from the Eastern
and Central European countries was the fact that since 1996 accountancy in Eastern
Europe has been closed as a topic area for concurrent sessions. At the same time,
for example, at the 1994 Annual Congress, where Eastern and Central Europeans
presented 21 papers (only one about management accounting), 25 papers from eight
market economy countries directly considered only activity-based costing (ABC)
(Friedman and Lyne, 1997).
In several European countries different surveys on management accounting have
been carried out. In the Eastern and Central European countries, proceeding from
the information at the authors disposal, initial surveys of the design of companies
cost and MAS have been carried out in Poland (Sobanska and Wnuk, 1999; Szychta,
2001, etc.) and in Estonia (Haldma, 1997). A comprehensive overview of the research
projects and publications addressing the state of cost accounting and management
accounting in Poland in 19932000 was given by Szychta (2001).
To sum up, the investigations on management accounting in the Eastern and
Central European countries indicate mainly state-of-the-art-type studies (except
Varmosi, 2000). One of the characteristics of these studies is the fact that the findings
are reported without using any theoretical framework. In the transition economies,
research projects on management accounting practices using the contingency
approach were conducted by Anderson and Lanen (1999, India), and Luther and
 Management Accounting Practices of Estonian Manufacturing Companies 383

Longden (2001, South Africa). But, the development of the management accounting
practices in the Eastern and Central European countries has not yet been studied in
detail.

3. The contingency approach framework

The contingency approach to management accounting is based on the premise

that there is no universally appropriate accounting system applying equally to
all organizations in all circumstances (Emmanuel et al., 1990, p. 57). Rather, it is
suggested that the particular features of an appropriate accounting system will
depend upon the specific circumstances in which an organization finds itself. How
effective the design of an accounting system is depends on its ability to adapt to
changes in external circumstances and internal factors.
We presume that organizations operate as open systems, being concerned about
their goals and responding to external and internal pressures. The contingency-based
approach assumes that MAS are adopted in order to assist managers in achieving
some desired company outcomes or goals. If a MAS is found to be appropriate, then
it is likely to provide enhanced information to the individuals who then can take
improved decisions and thus achieve the organizational goals in a better way.
The major external factors that have been examined at the company level in man-
agement accounting and control (including cost accounting) research are external
environment (Chapmann, 1997; Khandwalla, 1977; Merchant, 1990; Hartmann, 2000),
and national culture (Hofstede, 1984; Harrison, 1992; OConnor, 1995). The most
widely emphasized research aspects are environmental uncertainty and hostility. The
hardly predictable environmental elements have their own impact on organizational
structure, performance evaluation, budgeting and budgetary control, and are associ-
ated with more open and externally focused financial accounting systems. Environ-
mental hostility from intensive competition stresses the importance of formal control
and sophisticated accounting (Khandwalla, 1972; Otley, 1978).
The most common internal factors that have been examined in relation to manage-
ment accounting are organizational size (Khandwalla, 1972; Bruns and Waterhouse,
1975; Merchant, 1981), technology (Khandwalla, 1977; Merchant, 1984; Dunk, 1992),
and companies strategies (Miles and Snow, 1978; Gupta and Govindarajan, 1984;
Simons, 1987; Chenhall and Morris, 1995).
As organizations become larger, the need for managers to handle greater quantities
of information increases to a point where they have to institute controls, such as
rules, documentation, specialization of roles and functions, extended hierarchies and
greater decentralization down to hierarchical structures (Child and Mansfield, 1972).
Khandwalla (1972) found that large firms were more diversified in product lines, as
well as more divisionalized, and employed mass production techniques and more
sophisticated controls. According to Merchants study (1981), large companies are
more decentralized and use more sophisticated budgets in a participative way.
Technological contingency factors include the nature of the production process,
its degree of routine, how well meansend relationships are understood and the
amount of task variety (Emmanuel et al., 1990). More standardized and automated
process technologies are served by more traditional formal management control
systems with highly developed process controls (Khandwalla, 1972), high budget use
384 T. Haldma and K. Lts

External factors
- Business
environment
- Accounting
environment
Management Effectiveness of
accounting practices performance
- Cost management measurement and
- Budgeting evaluation
- Control, etc.

Internal factors
- Organisational
aspects
- Technology
- Strategy

Figure 1. Theoretical framework of the contingency approach.

(Merchant, 1984) and high budgetary controls (Dunk, 1992). Untight use of budgets
is less frequently found in the more predictable and automated process, and will be
positively related to less automated, less predictable job/batch type technologies.
Figure 1 shows the contingency-based theoretical framework. The described
process influences the management accounting practice and effectiveness of per-
formance measurement and evaluation. The contingencies are divided into two
general groups: external and internal factors. External factors indicate the features
of external environment at the level of business and accounting. Environmental
factors impact both on the internal characteristics of an organization and its man-
agement accounting practice. For example, fierce competition influences the choice
of strategy, organizational structure and also the application of appropriate cost
management and control. Internal contingencies are determined as organizational
aspects, technology and strategy. The effectiveness of performance measurement
and evaluation depends on the internal factors and the management accounting
practice. Additionally, feedback from the effectiveness of performance measurement
and evaluation of the management accounting practice can be considered.
Effectiveness can be defined by various measures, which all have their advantages
and disadvantages. We defined effectiveness as managers satisfaction with their
performance measurement and evaluation.
The list of contingencies and relations in our theoretical framework cannot be con-
sidered exhaustive, since we were unable to identify and include all factors and
impacts. Contingency-based studies assume the existing link between nature, the
use of the MAS and subsequently enhanced performance. At the same time, other
behavioural and organizational aspects also influence better goal achievement (e.g.
job satisfaction, working place environment, formal and informal control, participa-
tion in the budgeting process). In this paper we focus on the following major classes
of contingencies: the external environment, technology and organizational aspects.
These elements and their different impact on companies accounting systems are fur-
ther elaborated on.
 Management Accounting Practices of Estonian Manufacturing Companies 385

Empirical research of contingency theory in management accounting has been

conducted at different levels (industry, firm, units of a firm), considering different
contextual factors. This study was performed and analysed at the level of a company
or major business unit.

4. Research method

Current research builds on contingency theory and exploratory statistical analysis of

the factors influencing MAS in Estonian manufacturing companies. Herein we will
review the principles used to construct the data set for our work.
The empirical data were gathered by a postal survey in 181 larger Estonian man-
ufacturing companies. To develop an accurate mailing list, each company was tele-
phoned and the names and addresses of business units were identified, as well as
the name of the most eligible person within each business unit to complete the sur-
vey. These were typically financial directors, chief accountants, senior management
accountants or chief executives. These steps were considered important to increase
the accuracy of the survey responses. In Estonia the survey was pilot tested with a
group of chief accountants and financial directors to refine the design and focus the
content. The mailed survey package included an introductory letter explaining the
purpose of the research, a copy of the survey, and a pre-paid envelopefor returning
the survey. The study aimed at the design of cost and MAS in Estonian companies
and was carried out in 1999. The mailing resulted in 62 usable responses or a 34.3
per cent response rate. It seems to be acceptable, compared to other surveys carried
out in the area (Kind, 1985; Reichmann and Kleinschnittger, 1987; Drury et al., 1993;
Andersen and Rohde, 1994).
On the basis of the returned surveys a statistical analysis was carried out, using
one-way analysis, two-way analysis and Fishers Exact Test.
The responding companies in Estonia represented 15 different branches of man-
ufacturing, such as energy supplying, wood industry, food industry (covering
dairy, meat, fish, tobacco products and drinks), chemical, metal, textile industry,
etc. The predominant industries were food industry represented by 15 companies,
textile industry by 10, and wood industry by eight companies. A smaller number of
companies represented other branches of industry.
The population for the study comprised the countrys largest manufacturing com-
panies. Therefore, the findings of this study are related to the largest manufactur-
ing companies and should not be interpreted as relating to the general population
of manufacturing companies. In as much as size is associated with the availability
of resources to experiment with a range of management and accounting practices,
it is likely that the sample included a greater proportion of companies employing
advanced practices than the total population of manufacturers. Hence, the study
has its limitations if we want to generalize the results to all manufacturing compa-
nies in Estonia.
The categories of information that have been included into the survey cover the
following aspects of MAS: background, cost measurement and appraisal in financial
accounting, cost element accounting, cost centre accounting, costing methods, pricing
principles, budgeting, and internal performance measurement systems.
386 T. Haldma and K. Lts

5. Analysis of the contingencies influencing the development of management

accounting systems

5.1. Conceptual changes in the Estonian companies management and cost accounting
patterns during the period of transition
The process of development and implementation of cost accounting and MAS in
Estonia can be characterized by a competition between the traditional customs
and knowledge having their origins in the countrys centrally planned economic
background, on the one hand, and the need to solve urgent everyday management
problems, on the other. In centrally planned economies companies never had to face
such commercial problems as, for instance, what products should be produced or on
which markets they should be sold to bring them into profit. Decision-making was
highly centralized and accounting information was considered significant neither in
the decision-making process nor for performance evaluation. The income statement
used at that time was based solely on the cost by nature format. As product
prices were fixed by state officials, companies had to produce accurate information,
especially about their production costs. As a consequence of the unified measures
adopted by the State (based on a unified chart of accounts applied by all Soviet
companies), full costing became compulsory for all industrial enterprises. The full
costing approach was also supported by academics. A view was spread, according
to which the product cost had to include both manufacturing and selling costs and
all the other expenses of the company (Petrova, 1986, p. 8). Enthoven has pointed
out that in the conditions of a centrally planned economy, cost and management
accounting were not treated as independent branches, but as integral parts of unitary
financial accounting (Enthoven et al., 1993).
Under a centrally planned economy, several aspects of cost accounting were intro-
duced by Estonian companies, but this served the objectives of financial accounting,
statistics and centralized management. At that point, we fully agree with Enthoven.
However, it has to be admitted that in the highly centralized decision-making
framework, flexible rearrangements in the companies management systems of
external environmental impacts were not needed. Therefore, we argue that within
the Soviet accounting framework, management accounting existed in a very narrow
sense. Hence, during the first stage of transition, the MAS was a conceptually new
issue in the development of the companies accounting system whose design and
introduction necessitated a conceptual change in the thinking of the companies
financial personnel.
The first step towards the formation of a market economy accounting environment
in Estonia was made as early as 1990 when the Estonian Regulation on Accounting
was passed. This regulation marked the first attempt made in the country to establish
a legal basis for accounting requirements consistent with the internationally accepted
accounting principles. As pointed out by Bailey et al. (1995, p. 688), this event
marked the beginning of the spread of disharmony in accounting on the territories
comprising the USSR. With regaining independence in 1991, the economic situation
of Estonia changed dramatically. Besides other transformations, an entirely new
role was attributed to accounting by the market forces. The need to create and
develop conceptually different MAS was growing rapidly. In 199294, the Estonian
universities incorporated management accounting into their curricula as a separate
discipline. The above-mentioned Regulation on Accounting was in force from 1991
 Management Accounting Practices of Estonian Manufacturing Companies 387

to 1994. At that time, the official income statement format was based on cost by
nature since the full costing approach maintained its monopoly position. But the
new competitive environment generated a market-based need for variable costing.
Prompted by the changing needs of companies, cost accounting started to expand, as
a result of which management accounting emerged.
While in the market economy countries the fundamental nature of MAS and
practices has remained the same throughout the last decades (Drury et al., 1993),
the application of accounting within the management process has changed to some
degree (Bromwich and Bhimani, 1994). At the same time, both accounting as a whole
and financial as well as management accounting in Estonia and the other transition
economies underwent evolutionary changes in the first half of the 1990s.
The next, even more substantial and complex step in the accounting reform of
Estonia relates to the Estonian Accounting Law (EAL), which came into effect
in January 1995. Since its enforcement, the concepts of financial accounting that
Estonian companies are guided by have improved essentially. In accordance with
the EAL, companies can now use one of the two income statement formats: either the
cost by nature format (already introduced by the Regulation on Accounting) or the
cost by function format (which was new to the accounting practices of Estonia). In
addition to establishing the legal accounting framework, the law urged companies to
improve their cost accounting and MAS.
The implementation of the cost by function income statement format changed the
widely spread understanding about some aspects of cost accounting, e.g. the essence
and the formation of product unit cost. The EAL specifies that selling expenses,
administrative expenses, research and development expenses are period expenses
(Estonian Accounting Law, 1994, p. 34). These expenses should not be included
into the values of inventories and are, therefore, not part of the cost of goods sold
in the cost by function income statement format. Nor do they belong to product
unit costs. Consequently, as the EAL states, the values of inventories and the cost of
goods sold should be based on manufacturing costs. This is a conceptual difference
in comparison with the full costing methods characteristic of and solely used by a
centrally planned economy. Although the law stipulates no systematic requirements
for companies cost accounting systems, the implementation of the cost by function
income statement format made it necessary to pay more attention to objective cost
allocation methods in order to receive more objective information for product-mix
decisions, profit budgeting and profit-conscious pricing.
74 per cent of the respondents of the survey had made changes in different cost
aspects concerning their accounting systems in the years 199699. One-half of the
respondents planned to make changes in their cost accounting system which would
yield more detailed and segmented cost information. Among the main areas needing
improvement, the following were pointed out: the companies cost allocation meth-
ods, the product costing methods, the implementation of variable costing with the
contribution margin approach, and the introduction of the ABC system.
The respondents to our survey admitted that two main driving forces had made
them develop their companies cost accounting systems: namely, the need for more
detailed divisional (segmental) performance information (66% of the respondents)
and changes in the organizational structure (42%) (see Table 2). Thus, the growing
market pressures have raised the companies awareness about the need for more
detailed cost information. Such catalysts as changes in production technology and
388 T. Haldma and K. Lts

Table 2
Factors prompting changes in cost accounting systems in 19961999

Factors Number of %
companies
Need for divisional (segmental)
performance information 41 66
Changes in organizational structure 26 42
Changes in production structure 16 26
Changes in production technology 10 16
Changes in market structure 8 13
Other reasons 6 10

market structure had comparatively less influence on the improvements made by

the companies in their cost accounting systems (see Table 2).
Subsequently, we will try to set the expanded list of causes into the contingency
approach framework. In the survey, we asked the respondents to indicate on a five
point scale what significance any of the catalysts had had on the improvement of
their cost accounting and MAS.
Table 3 describes the drivers that have either sped up or slowed down the transfor-
mations in the Estonian companies cost and MAS. While all of them had a generally
positive (i.e. speeding-up) influence, the most forceful among them were the need
for more detailed divisional (segmental) performance information, availability/non-
availability of competent financial staff, changes in the managerial practices, and
advances in information technology. According to Table 3, among the other drivers
the change of production technology and the impact of retraining programmes had
the lowest standard deviation and a tendency to spread, in the respondents opinion.
The opinions differed most about how the level of satisfaction with the performance
measurement systems influenced the change of the accounting systems.
The driving forces behind the emergence of cost accounting and management
accounting (see Table 3) reflect different environmental, technological and organi-
zational aspects of the companies accounting patterns. Therefore, in what follows
they will be regarded as the contingencies that influence cost and management
accounting in the Estonian manufacturing companies.

5.2. Impact of environmental aspects

The environment is a term used to explain a number of facets. Relevant features
of an organizations environment which affect the design of its accounting system
include the degree of predictability, the extent of competition faced on the market
place, and the number of different product-markets faced by a degree of hostility
(price, product, technological and distribution competition) (Emmanuel et al., 1990,
p. 57). It is suggested that increasing structural complexity will lead to the addition
of new accounting tools to those already in use.
Considering the above-mentioned role of financial accounting in the formation pro-
cess of the accounting framework during transition, we argue that the environmental
aspects affecting companies MAS in the initial period of transition can be distin-
guished at two different levels:
(1) the general business or external environment level and
 Management Accounting Practices of Estonian Manufacturing Companies 389

Table 3
Drivers that have slowed down or sped up changes in accounting systems (1slowed down significantly,
2slowed down to some degree, 3no effect, 4sped up to some degree, 5sped up significantly)

Drivers of cost and management accounting Contingency Mean Stand.

change characteristic deviation
Need for more detailed divisional (segmental) OA 4.36 1.12
performance information
Availability of competent financial staff OA 4.25 0.81
Changes in managerial practices OA 4.07 1.02
Advances in information technology OA 3.91 1.17
Tightening competition E 3.84 1.07
Changes in the organizational structure OA 3.70 1.01
Impact of retraining programmes E 3.56 0.76
Dissatisfaction with the performance OA 3.52 1.23
measurement systems
Change of production technology T 3.48 0.72
Change of production structure E 3.44 0.89
Benchmarking of cost and management E 3.39 0.82
accounting methods
Change of the market structure E 3.36 0.82
Eenvironmental aspect, OAorganizational aspect, Ttechnological aspect of a company.

(2) the legal accounting environment level.

The external environment will affect the nature of the accounting system, for any
particular accounting system chosen aims to facilitate the companys adaption to the
environment it faces. In the course of transition from a centrally planned to a market
economy, a companys accounting system is affected by two mutually connected
changes related to the ways they utilize accounting information (Alver et al., 1996,
p. 3):
1. a change from the state to the business community as the primary user;
2. a change from the passive role to an active role in the stimulation of economic
activity.
In the second half of the 1990s, the development of the general business environ-
ment in Estonia was affected by the following events:
conceptual changes in the regulatory context (enforcement of the Accounting Law
in January 1995 and of the Commercial Code in September 1995, etc.);
ownership changes (the most intensive period of privatization was 199395);
development of the capital market (the Tallinn Stock Exchange opened in May
1996);
recession on the Eastern markets (the Asian crises in 1997, the Russian crisis in
1998).
In the main, these systematic factors had an indirect impact on the companies
MAS; but the above-mentioned recession on the Eastern markets tightened the
competition on the domestic markets. Increased competition and raised production
quality standards required adoption of a more sophisticated and market-sensitive
internal MAS.
390 T. Haldma and K. Lts

From the list of drivers given in Table 3, the following items indicate what
environmental aspects influence the accounting system:
the need for a more detailed divisional (segmental) performance information;
tightening competition;
change of production structure;
benchmarking of the cost and management accounting methods;
change of the market structure;
retraining programmes.
A more competitive marketplace, its greater dynamism and heterogeneity, and a
more intensive operating environment all broadly suggest that the accounting sys-
tem should become more sophisticated and complex, and capable of evaluating man-
agerial performance in more varied ways. The need for more detailed divisional
(segmental) performance information reflects both environmental and organizational
aspects of impacts on management accounting, depending on a particular perfor-
mance unit involved. In our conception, performance units such as product groups,
client groups, sales regions, etc. reflect environmental aspects, while such perfor-
mance units as organizational units reflect an organizational aspect. Concerning the
environmental aspects, more than one-half of the surveyed companies based their
performance measurement on the product groups (52% of the respondents), much
fewer on their client groups (20%) and still fewer on the sales regions (17%). The
majority of the companies monitored and evaluated the profits and profitability mea-
sures of different internal business units and products or product groups, while only
a few companies stated that they measured the profitability of their client groups and
sales regions. Consequently, the companies performance measurement system was
manufacturing-oriented rather than market-oriented.
Tightening competition: changes both in the market structure and in the produc-
tion structure precipitated the need for a market-sensitive attitude in performance
measurement and for receiving objective and appropriate cost information about dif-
ferent cost units (cost objects). No longer could the companies expect to cover costs
automatically, simply by engaging in full cost accounting or by charging their cus-
tomers a full-cost-based price. A challenge for variable costing had emerged.
A comprehensive cost accounting system serves as a basis for understanding
the process of cost formation in the companies value chain, in order to analyse
and manage cost behaviour. Cost accounting generally includes four broad areas:
cost elements (types) accounting; cost centre accounting; cost objects (cost units)
accounting, and operative performance measurement (Mayer et al., 1994). Although
there has been a big change in perceiving the role and relevance of cost and
management accounting, the managers of Estonian companies still interpret their
objectives, methods and influence on management decisions in differing ways.
The majority (80%) of the companies divide their costs into manufacturing and
non-manufacturing ones, 58 per cent into variable and fixed ones, and 75 per cent of
the companies into direct and indirect ones. Although in formal terms cost analysis
has been widely introduced, many companies have chosen overly broad accounting
segments and units. The analysis of directindirect costs was carried out mainly
within an organizational dimension and that of variablefixed costs within a product
dimension. On the issues of cost accounting the survey yielded the results shown in
Table 4.
 Management Accounting Practices of Estonian Manufacturing Companies 391

Table 4
Principles and methods used in product costing by the Estonian manufacturing companies

Product costing principles Proportion (%)

(N = 62)
Full costing 54.8
Variable costing 38.7
Variable costing and full costing 6.5
Product costing methods Proportion (%)
Process costing 51.3
Job-order costing 33.7
Both 15
ABC 7

Concerning the principles of product costing, our survey indicated that 54.8 per
cent of the companies follow the principles of full costing, 38.7 per cent those of
variable costing and 6.5 per cent both of them. From among the product costing
methods, 51.3 per cent preferred process costing and 33.7 per cent job-order costing,
while 15 per cent of the companies used both methods. In our estimation, only 7 per
cent of the respondents use ABC.
Our survey indicated that manufacturing overheads were usually allocated on a
volume basis. As the main allocation bases, direct labour costs (42% of respondents),
sales volume (38%), direct labour hours (28%), direct materials (26%), machine-hours
(16%) and the number of operating cycles (8%) were used. Non-manufacturing over-
heads were usually assigned according to the manufacturing costs of the products,
to a lesser degree according to sales volumes. Our survey also indicated that 50 per
cent of the companies used up to two and 70 per cent up to four different allocation
bases. In most companies direct costs are not connected with technological maps of
the manufacturing process, which implies an arbitrary choice of cost allocation rates.
Unfortunately, such a limited approach could not yield a comprehensive picture of
the cost formation process in manufacturing.
To measure the operative performance of different operating segments, internal
reporting systems had been introduced by 82 per cent of the responding companies.
A large number of the companies, however, compiled their internal performance
reports on the basis of their financial accounting statements. The cost by nature
income statement format was used by 48 per cent and the cost by function format
by 53 per cent of the respondents. Both formats were used by four companies (6%).
Variable costing with the costvolumeprofit analysis offered a convenient and more
objective way to get an idea about the cost formation process in manufacturing,
to fix the price ranges and to realize an active pricing policy. However, in parallel
with the above-mentioned income statement formats, a couple of companies have
used the contribution margin approach, although to a limited extent. 21 per cent
of the companies prepare their internal income statements according to the multi-
step and 28 per cent according to the single-step contribution margin approach.
This tendency shows that the Estonian companies MAS have to provide more
detailed cost information in order to help managers to take decisions and manage
performance. There is an interaction between the external and internal aspects of
reporting: objective information about the cost of activities, products, services, etc.
392 T. Haldma and K. Lts

serve as a foundation for an adequate evaluation of the cost of the goods sold
and inventory. Consequently, cost accounting serves as an information basis for the
performance measurement systems.
The development of cost accounting and management accounting, and the appli-
cation of the variable costing and contribution margin approaches in performance
measurement are more associated with the efforts of academics and consultants
than those of practitioners. In the mid-1990s, most active practitioners in the field
of accounting had been trained in the conditions of a centrally planned economy.
As mentioned above, a full costing approach could not provide the management
with objective information on costing, pricing and cost management. Our interviews
in the companies revealed a critical shortage of competent financially trained staff.
Academic knowledge of accounting was infiltrating into the cost accounting and
management accounting practices of the companies little by little. Thanks to the
companies close contacts with the teaching staff of accounting in the educational
establishments, seminars were held for the top management and employees in
accountancy. This helped to transmit new ideas and techniques into the actual
practice.
Regarding the legal accounting environment as a driver influencing the develop-
ment of cost and management accounting, we suggest that this is a characteristic
feature of the transition economies. Our suggestion rests on the following conceptual
moments. Among the other improvements made in accounting during the transition
period, the first priority was given to financial accounting. This approach was justi-
fied, as it was first and foremost necessary to guarantee that the companies of the
country would be able to prepare their financial statements in compliance with the
EAL and the generally accepted accounting principles. After the EAL was enforced,
the companies were required to conceptually redesign their financial accounting sys-
tems. The idea that the companies should carefully observe the stipulations of the
EAL was adamantly supported by the big six auditing companies operating in
Estonia. On the other hand, the compulsory reconstruction of their financial account-
ing systems did not let the companies pay enough attention to the improvement of
their internal accounting systems (including cost accounting, management account-
ing, management control, etc).
Proceeding from the previous statements, we argue that the conceptual changes in
financial accounting characteristics of the Eastern and Central European transition
countries served as a precondition for the design, introduction and improvement of
cost accounting and management accounting, and the development of companies
MAS. Market economy countries have not experienced such a conceptual change
in financial accounting in such a short time during the last decades. We support
Virtanen et al. (1996) and Scherrer (1996) who say that the evolution of financial
accounting has influenced the development of cost accounting and management
accounting.
Studying the classification of the expenses in the chart of accounts, it becomes
evident that in 199095 the most frequently used classification was based on cost
by nature, whereas since 1995, the classification based on cost by function has been
preferred. For example, the expenses classification based on cost by function was
used by 13 per cent of the respondents in 1996 and by 60 per cent in 1999. This
can be viewed as a conceptual change. Wider implementation of cost classification
and the cost by function format of the income statement induced a debate about
 Management Accounting Practices of Estonian Manufacturing Companies 393

the allocation methods of fixed overhead costs used by Estonian companies. This
opened the way to improving the cost allocation and product costing methods, the
implementation of variable costing with the contribution margin approach, and the
introduction of the ABC system. But 65 per cent of the companies were still using the
cost by nature-based classification and one-quarter of the respondents were using
both classification bases simultaneously. However, 53 per cent of the responding
Estonian companies included non-manufacturing costs into product costs. A large
majority used the cost by nature income statement format.
The accounting framework and the procedures to be followed by Estonian compa-
nies and institutions are legally regulated by the following:
the EAL;
the accounting standards issued by the Estonian Board of Accounting Standards.
In a certain sense, this concept is unique, and appeared to have a number of
advantages in the early history of the regulation of accounting (the transition period),
enabling the country to carry out the transition process in a flexible manner. Since
1995, 16 accounting standards (EASs) have been issued to improve particular aspects
of accounting in Estonia. The valuation of the cost of goods sold and inventory
items are regulated by the following EASs: EAS 6Balance Sheet Accounts (in
compliance with many IAS standards, such as IAS 2, Inventories, IAS 16, Property,
Plant and Equipment, etc.), EAS 7Income Statement Accounts (in line with IAS 8,
Net Profit for the Period, Fundamental Errors and Changes in Accounting Policies),
and EAS 14Segment Reporting (in compliance with IAS 14, Segment Reporting).
Consequently, the pressure from the legal accounting environment to improve the
methods of cost allocation and product costing, on the one hand, and cost accounting,
on the other, serve as an information basis for compiling true and fair financial
statements.

5.3. Impact of technological aspects

It is argued that the production process will affect the selection of the type of costing
system. A production facility that produces individual products to specific criteria
will require a very different costing mechanism to the one that is geared up to mass
production with high joint fixed costs.
Due to product inter-dependence, there is a technological constraint on the design
of an accounting system. New technology will evidently lead to a change in cost
structures. Therefore, while the technological progress continues, the accounting
system might probably become more complex and sophisticated, and capable of
following cost appearance in the manufacturing process more precisely. From among
the drivers of cost accounting and management accounting given in Tables 2 and 3,
the change of production technology reflects a technological feature. As mentioned
above, this factor failed to have a sufficient impact on the companies accounting
practices in Estonia. However, the tightening global competition and increasing
fixed costs associated with the use of advanced manufacturing technologies have
prompted the need to analyse, allocate and manage fixed costs better. In 63 per
cent of the responding companies the share of manufacturing overheads in the
manufacturing costs was up to 30 per cent, while in 11 per cent of the companies
it exceeded 50 per cent. 13 per cent of the companies, unfortunately, were not used to
distinguishing the manufacturing overhead costs.
394 T. Haldma and K. Lts

Detailed cost centre accounting helps us to understand where the costs appear
and to clarify the connections between the costs and cost objects. An analysis of
the implementation of cost centres revealed that 72 per cent of the companies have
introduced cost centre accounting. At the same time, manufacturing overheads are
measured in the cost centres at the equipment level by 14 per cent of the companies,
at the production line level by 27 per cent, and at the sub-unit or company level by
59 per cent of the companies. These results indicate that manufacturing overheads
are broadly defined, which in the future may raise potential difficulties when trying
to relate these costs with their cost objects (products), and may cause problems in
the whole product costing area. It is apparent that the application of cost centre
accounting tends to increase in line with company size. As indicated by our survey, 90
per cent of the companies whose sales volumes exceeded 6.5 million euros applied
cost centre accounting, while only 59 per cent of the companies with smaller sales
volumes did so. Our study revealed no clear distinction in the MAS design among
different production technologies. The allocation of maintenance department costs
among production cost centres was in 47 per cent of the cases based on a company-
wide rate and in 26 per cent of the cases on a plant-wide rate. Such behaviour refers
to inaccurate information about the consumption of these supporting services by
the manufacturing process of the particular products. In order to get objective cost
information and avoid potential problems, the companies would need to use more
specified cost drivers.

5.4. Impact of organizational aspects

From the list of drivers in Table 3, the following items reflect the organizational
aspects influencing the accounting system:

Need for more detailed divisional (segmental) performance information;

Availability/non-availability of competent financial staff;
Changes in managerial practice;
Advances in information technology;
Changes in the organizational structure;
Dissatisfaction with the performance measurement system.

These have been the most crucial drivers speeding up the changes in the manage-
ment accounting practices of the Estonian manufacturing companies. Among these,
the need for more detailed divisional (segmental) performance information had the
strongest influence on the changes in the MAS. As mentioned above, the need for
more detailed divisional (segmental) performance information reflects both environ-
mental and organizational aspects of impacts on management accounting, depend-
ing on the performance unit involved. Such performance units as product groups,
client groups, sales regions etc. indicate environmental aspects in our conception and
their impact was analysed in Section 5.2. Organizational units such as performance
units reflect organizational aspects. In most companies (68%) performance measure-
ment is based on different operating segments or divisions. The majority of the com-
panies monitored and evaluated the profits of different internal business units and
products or product groups; only a few companies stated that they measured the
profitability of their client groups and sales regions. 74 per cent used profitability as
a performance measurement indicator and 26 per cent did not measure profitability
 Management Accounting Practices of Estonian Manufacturing Companies 395

at all. The profitability calculations were predominantly based on the profits of the
business units and products.
We divided our research population into two groups: smaller companies with sales
less than 13 million euros and bigger companies with sales over 13 million euros (see
Appendix A). As a rule, smaller companies preferred to prepare and use budgets for
the company as a whole (92%). Only 47 per cent of these companies prepared budgets
for internal business units and 51 per cent applied more detailed cost budgets. The
performance measurement and variance analysis between the budgeted and actual
results was also carried out at company level, and to a lesser extent at internal
business units level.
Larger companies used more sophisticated budgets. They all composed budgets
for internal business units and 90 per cent of them used more detailed cost budgets.
They used more sophisticated performance measurement systems (e.g. for evaluating
the performance of different products or business units, but also that of different
regions or customer segments). This result supports the findings by Merchant (1984),
according to whom it is large companies that use more sophisticated budgets.
Internal performance measurement and reporting systems were introduced in 82
per cent of the responding companies. Nevertheless, most of the companies used
the financial accounting statement formats as a source for internal reporting. The
contribution margin approach was applied to a lesser extent. There was a difference
between larger and smaller companies: 50 per cent of the bigger and 18 per cent of
the smaller companies applied the contribution margin approach in their internal
reporting.
It is apparent that the level of sophistication of a cost accounting system tends
to increase in line with company size. Our survey indicated that larger companies
were more inclined to record their costs at production line and equipment level,
while companies with sales revenues under 13 million euros evaluated their costs
at company or department level.
Luther and Longden (2001) found a positive relationship between pressure exerted
by controlling shareholders and management accounting change. All the companies
involved in our sample (62 companies) were privatized. In our survey we distin-
guished between three groups of companies on the basis of their independence con-
cerning the design of their internal accounting systems and foreign capital involve-
ment:

Single companies (incl. parent companies) which were responsible for and
independent in designing their internal accounting system (incl. cost accounting,
internal performance measurement, etc.)36 companies (58% of the population).
In this group, only in two companies the majority of shares was owned by foreign
capital (5.5% of the group population).
Subsidiaries of the group which were responsible for and independent in design-
ing their internal accounting system15 companies (24.3% of the population). In
eight companies the majority of shares was owned by foreign capital (53.3% of
the group population).
Subsidiaries of the group in which the design of their internal accounting system
was regulated by parent companies11 companies (17.7% of the population). In
10 companies the majority of shares was owned by foreign capital (90.9% of the
group population).
396 T. Haldma and K. Lts

We analysed these companies cost accounting and management accounting

aspects, considering their independence in designing their internal accounting
systems and foreign capital involvement in them, on the one hand, and implemen-
tation of more advanced cost accounting and management accounting approaches
(variable costing, the contribution margin approach, ABC), on the other. We did not
get any clear evidence to support the idea that shareholders pressure and foreign
capital involvement actually directly affect the designing of accounting systems.
Only in one aspect was certain evidence found. In 46 per cent of the companies,
the subsidiaries of the group which were independent in designing their internal
accounting system (second group) implemented variable costing (on average in
38.7% of the companies). However, concerning the ownership aspect (foreign capital
involvement), no difference was revealed between the companies MAS design.
The companies which implemented the variable costing and the contribution mar-
gin approaches ranked such drivers of management accounting as availability/non-
availability of competent financial staff and changes in managerial practice highest.
This may be attributed to increased application of modern management techniques
as a result of increased awareness, education and retraining programs. On the other
hand, the shortage of qualified accountants may serve as a crucial aspect, as far as
application of contemporary management accounting techniques is concerned.
In internal reporting the main issues are stressed in monthly and annual reports.
Additionally, companies also prepare the operating cost reports according to the
organizational structure. The results indicate that one-half of the companies used
different principles when designing their budgets and internal reports. All the
companies with sales over 13 million euros stated that they prepared budgets for
business units using the contribution margin approach, but only one-half of them
evaluated the performance in the reports according to the same principle. Among
the smaller companies, the contribution margin approach was used in budgeting by
46 per cent of the companies and in internal performance measurement (reporting)
by 19 per cent. The insufficiently related budgeting and reporting systems indicate
that many companies do not use accounting information systematically for clear and
useful purposes. This may raise serious problems for managers who plan and control
their companies performance.

5.5. Need for further improvements

The areas of cost accounting and management were highly important issues for 70
per cent of the companies, whereas 5 per cent of the respondents found that these
areas had no significance for them.
As mentioned above, dissatisfaction with the performance measurement system,
which was unable to provide appropriate information for decision-making, served
as a significant catalyst in improving the cost accounting and MAS. In the survey
we requested the respondents to assess on a three-point scale their degree of content-
ment with their companies performance measurement system. Among the surveyed
population, 20 per cent of the companies stated that they were satisfied, 68 per cent
were partly satisfied and 10 per cent were dissatisfied. There was no clear differ-
ence between the performance of smaller and larger companies. All the companies,
whose managers stated that they were satisfied with the performance measurement,
used more comprehensive cost budgets, but only 27 per cent of them had integrated
 Management Accounting Practices of Estonian Manufacturing Companies 397

similar approaches in budgeting, performance measurement and reporting. The dis-

satisfied companies had applied no internal budgeting or performance measurement
at all. Consequently, there is a need for certain improvements to be made in the com-
panies cost accounting and MAS.

6. Conclusion

This study shows that the contingency framework helps to structure the impact of
various drivers upon the design and use of cost accounting and MAS in a transition
economy.
By exploring the drivers of accounting in Estonian manufacturing companies we
may have succeeded in shedding some light on the role of management accounting in
companies of transition societies. Our research confirms some prior findings related
to influencing contingencies, such as tightening competition and organization size,
and introduces possible new drivers, such as the legal accounting environment and
shortage of qualified accountants. These features are characteristic of transitional
countries. Subsequently we conclude that the conceptual change in the area of
financial accounting characteristic of the Eastern and Central European transition
countries served as a precondition for the design and introduction of management
accounting and for the development of companies MAS. Market economy countries
have not experienced such a conceptual change in financial accounting within such
a short period of time.
Our study, which analysed the development of management accounting in Esto-
nian manufacturing companies by means of the contingency approach, revealed the
following issues:

Broadly defined cost centres may raise potential difficulties in relating different
cost elements with the cost objects (products), and hence problems will occur in
the whole product costing area;
There was no clear distinction between the MAS designs of different production
technologies;
Most of the companies used the financial accounting statement formats as a
source for internal reporting;
The insufficiently related budgeting and reporting systems indicated that many
companies failed to use accounting information systematically for clearly defined
and useful purposes;
In most companies, performance measurement was based on different functions
and product groups, to a lesser extent on client groups and sales regions.

Finally, we would like to admit that this exploratory study has certain limitations.
First, it has a static character. It would be useful to expand the survey on more
longitudinal aspects and management accounting change, on the one hand, and
on specific management techniques in a more detailed way, on the other. Secondly,
we recognize that the comparatively low number of responses to our questionnaire
survey may have caused a bias.
398 T. Haldma and K. Lts

Acknowledgements

The authors are grateful to Gary Cunningham for his constructive comments and
to two anonymous reviewers for their excellent comments and suggestions. The
financial support from the Estonian Science Foundation is herein acknowledged with
gratitude.

Appendix A

Net sales of the surveyed companies

Net sales Number of Cumulative Cumulative
(million euros) companies % frequency %
Up to 3.7 15 25.2 34 38.7
3.86.5 19 30.6 34 54.8
6.613 17 27.4 51 82.3
13.132 8 12.9 59 95.2
Over 32 3 4.8 62 100

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